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Why You Should Consider Consolidating Past 401k Plans Thumbnail

Why You Should Consider Consolidating Past 401k Plans

Melissa A. Seamon, CFP® 

Senior Financial Advisor 

What should you do with your 401(k) after you separate from your employer? Below are four options:

  1. Leave the money in your former employer’s plan, if permitted. (If the balance is too small, your employer may require you to roll it to a new plan or an IRA Rollover.)
  2. Roll over the assets to your new employer’s plan if one is available and rollovers are permitted. (Rollovers are usually permitted.)
  3. Roll the assets into an IRA Rollover account. 
  4. Cash out the account value (Not recommended.)

Many people don’t give it another thought once they leave a job, choosing to leave it as is by default. By not making a decision, they could be complicating their lives and relegating their retirement funds to long-term underperformance, which few people can afford. Here’s why:

Limited investment options

You may be happy with the performance of the funds you’ve had in your 401(k) but, compared to the nearly unlimited investment options available outside of the plan, you could cut yourself short. If your plan offers a limited range of investment options – and many do! - it may be difficult to develop a strategy best suited to your investment objectives and risk profile.

When you leave an employer, it’s an opportunity to evaluate the fund options in your 401(k) and compare them with the universe of funds available to you with an IRA. While fund performance should be an important consideration, you should also consider investment costs. It’s not uncommon for funds inside a 401(k) plan to have higher management fees. The difference between paying 1.5% and .05% in annual fees could translate to thousands of dollars lost from your account over time. When you have the option to choose equivalent or better funds with no sales loads and management fees of .05% or less, you take it because it is an automatic improvement in the return on your money.

Complicates your financial life

It’s common for some people to change jobs several times, especially early on, when trying to move up the career ladder. In doing so, they leave behind a string of 401(k) accounts, each with its own fund lineup, online account management, and custodian. Not only could this create a personal finance nightmare, but it could also hurt the long-term performance of your retirement funds. 

It may not seem like a big deal when your account balances are small. But, when they grow to a significant number, and you need to pay more attention to your asset allocation strategy across multiple plans, it becomes much more complex than it needs to be. 

By rolling your retirement plans into a single IRA account, you gain more control while lowering costs. Besides, who needs the stress? Sound financial management is as much about simplifying your life as it is about making good decisions, both of which are achieved when you have fewer things to manage. 

Important considerations

While there are some clear advantages to rolling a 401(k) plan into an IRA and consolidating accounts in general, there are several things to consider that have tax and retirement planning implications. 

Taxation of indirect rollovers

When rolling a 401(k) account into an IRA, always ask your plan sponsor for a direct transfer of the funds between custodians. 

In contrast, an indirect rollover is distributed to you in the form of a check and then you have 60 days to deposit it into an IRA Rollover. If you miss that 60-day deadline, the “rollover” becomes a “distribution”, and the plan administrator must withhold 20% toward any taxes you will owe. If you’re under age 59 ½, you will also pay a 10% penalty! If it sounds scary, it’s because it’s meant to be! 

          Tip: Avoid an indirect rollover whenever possible.


Early retirement withdrawal


If you are considering early retirement, you may only want to roll over some of your 401(k) funds. That’s because a 401(k) plan allows for withdrawals as early as age 55 without penalty. Early withdrawals from an IRA are also available, but it’s more complicated. 

Any decision regarding your retirement accounts should be considered in the context of an overall financial plan, especially when there are potential tax implications. Consider it an excellent opportunity to meet with a qualified financial advisor to discuss your options and the most appropriate course of action. 

At Gardey Financial Advisors, we help you look at the entire picture to plug in the strategies that make the most sense for you. If you are in need of a financial ally, we encourage you to visit our site, learn more about our services, and see if we could be a good match.  We best serve clients looking for exceptional client service, who value a long-term partnership, and have a minimum of $500,000 in investable assets.

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